Forecasting Interest Rates Based on Prevailing Conditions

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I need a feedback on this student paper: Considering that the following factors of inflation, the economy, the budget deficit, and the monetary policy of the Fed can affect the interest rates in the United States, how will the interest rates change in the next six months? I believe that the interest rates will increase. The Federal Reserve itself sees this as a possibility as well because of their prediction that “the main interest rate will rise to 1% by the end of 2015, higher than previously forecast” (Kearns & Torres, 2014, para.24). One of their reasons is due to the decrease in unemployment as businesses invest more. This increase in demand for funds as well as an increase in inflation will put upward pressure on interest rates. Based on the prevailing conditions in the world today, the interest rates will generally increase, or that there will be upward pressure on the interest rates. Some of the factors that affect the interest rate levels are: “impact of economic growth, impact of inflation, impact of monetary policy, impact of budget deficit, and impact of foreign flows of funds” (Madura, 2014, p.35-40). The impacts of these factors are interrelated, not stand alone, which makes it difficult to accurately forecast what will happen to the interest rates. In general, the supply of funds will go up as interest rates increase, and the demand for funds will decrease as interest rates rise. With the unrest around the world including in Ukraine, Iraq, Syria, and Venezuela, there will be inflationary pressures on the oil prices as the oil supplies availability come into question. This threat of war and international turmoil may cause declines in the supplies of oil which in turn will cause increased prices for oil. These costs are then passed on through the value chain via increased production and distribution costs, increased supply and raw material costs as a result of increased fuel and transportation costs. Inflation will increase because of the higher general prices of goods and services due to the recouping of fuel costs. Businesses will also reign in on capital purchases and expansion plans in order to keep their operating costs in line. The US economy and the enduring budget deficit and debt will also impact the interest rates. One issue that could be negatively impacting the economy is the holding the supply of funds available artificially low is due to the fact that banks are holding excess reserves rather than loaning them out (Keister & McAndrews, 2009). This makes capital funds much harder to get due to tougher credit approval processes, and at higher costs. Furthermore, companies and investors will require more return on their investments for taking increasing risks. Companies will tighten their belts and hold off on expanding production, in fact, they may go into a cost cutting mode, which may increase unemployment as well. The Fed may or may not act to address this through its monetary policy. In general, they can affect interest rates by controlling the money supply (Madura, 2014). All of these factors put pressure on the interest rate levels
however, I believe the biggest factor will be the rising inflation caused by oil supply uncertainty. Jun 19 2014 11:12 PM

 

Solution ID:608860 | This paper was updated on 26-Nov-2015

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